LONDON: Italian bond yields rose sharply on Monday, extending last week's move, as a news report suggested Italy's budget proposal was set to be rejected by the European Commission.
Italian daily La Repubblica reported on Monday that the Commission was set to reject Italy's budget plans in November and open a procedure against its public accounts in February.
Italy's two-year government bond yield surged 18 basis points to 1.23 percent, before receding to 1.19 percent, while the yield on its longer 10-year government bond was up nine basis points at 3.24 percent.,.
The premium investors demand for holding Italian debt over top-rated German bonds was 274 basis points on Monday, having been as tight as 225 basis points last week.
"It's hard to envisage spreads moving back towards the low end of the range in coming months," wrote ING analysts in a note on Monday.
The report comes after a fraught week for investors in Italian debt.
Italian government bond yields and banking stocks were hit hard on Friday after Italy's ruling parties -- the anti-establishment 5-Star Movement and the right-wing League -- proposed a budget for 2019 with a budget deficit target of 2.4 percent of gross domestic product.
"It is quite clear that the European Commission will not like (the budget proposal)," said Commerzbank rates strategist Michael Leister.
"Brussels will give its opinion which we think won't be positive and ... the ratings agencies will opt for a similar stance. A downgrade is our base case."
Tria moved to temper concerns that Italy's enormous debt pile - 131 percent of GDP - would continue to grow, saying on Sunday investments would fuel economic growth over the next two years and put debt on a downward path.
Elsewhere, euro zone bond yields were one to two basis points higher, as a last-gasp deal between the United States and Canada on Sunday to salvage the North American Free Trade Agreement (NAFTA) pushed investors to riskier assets.
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